Why should you be cautious of payday loans? This might seem like a very simple and straight forward answer to a lot of people, but for some, more specifically people who tend to use payday loans regularly this might be a very difficult question to answer. In this simple guide we try and explain why payday loans are usually the worst option you can choose if you need some quick cash.
At one point or another, everyone has found themselves in a financially tight spot. If you have been there before, it’s hard to be picky about where to get the money you need. These days, many payday loan lenders offer same-day payday loans instantly.
Suppose you are considering taking a payday loan to cover a short-term expense. In that case, you might want to reconsider that option and opt for other ways. In this article, we have covered why should you be cautious of payday loans and why they might do more harm than good and other options you should consider.
Why Should You Be Cautious of Payday Loans – What is a Payday Loan?
A payday loan is a short-term loan with often outrageous high interest offered by direct loan lenders. The loan limit is usually less than $500 and has a limit of a few weeks. Payday loans are often marketed to high-risk borrowers.
If you are in a financial crisis and need money before your next paycheck, you can apply for a payday loan. Payday loans are available online and in person.
For you to qualify for a payday loan, you need to provide the lender proof of income or pay a stub. Lenders may also check your legal information or savings account details.
The payday loans concept is straightforward: you borrow a loan at a fee and pay it back by your next payday. If you do not mind the extra cost, a payday loan won’t cause any harm, provided it doesn’t become a habit.
Why are Payday Loans Popular?
Even though payday loans are high-cost loans, they are popular among borrowers. This is because they do not require a credit check from the credit bureaus. They also rarely look into your credit history. If you have a bad credit history, it’s easier to acquire a payday loan than a bank or financial institution’s loan.
Unlike the usual loans, payday loans are usually processed very quickly. Some can be processed within a day. If you have an urgent requirement, it’s faster to get the loan than other means.
Due to its quick disbursement, most of us tend to opt for payday loans. You might also prefer it if you find it challenging to acquire a payday loan in a bank due to poor credit history.
Payday lenders target people with little financial education, low-income areas, and weak credit. Since people under these categories are often desperate for credit and don’t understand technical terms, they offer loans at high-interest rates and additional fee charges.
Reasons to Avoid Payday Loans
Financial emergencies can be hard to avoid due to daily expenditure and low-income rates. However, when disaster strikes, the best thing you can do is prevent payday loans. Here are some of the reasons to avoid payday loans.
- High-Interest Rates
One of the primary reasons to avoid a payday loan is the high-interest rates. They are often higher than credit cards and personal loans interest rates. This is one of the main reasons payday loans are prohibited in some states.
Payday loans often charge interests rates that range between 15 to 30 percent of the borrowed amount a month. This is a criminally high-interest rate, considering it is a short-term loan.
When you calculate the annual interest of payday loans, you end up with a lump sum amount of money. For example, if you loan $ 1000, the payday loan service will cost you a total interest of $328. You will be paying a third of the money you are in desperate need of.
- High Fees and Additional Charges
If you cannot pay the payday loan back within the given amount, you may have to pay additional charges. A report from the Consumer Financial Protection Bureau, more than 75% of payday loans are often rolled over. In such cases, you may be charged with check return changes, interest for the extra time, and late payment charges.
In such situations, you can quickly feel trapped with these fees added to the initial loan. Sometimes additional charges can pile up to twice the amount of the loan you took in the first place. What started off as a quick fix manageable loan can accumulate into a debt cycle.
The more the fees increase, the harder it is to pay the loan in full. In these cases, you have to renew the loan repeatedly, thereby accumulating more debt.
- Payday Loans Can Lead to a Debt Cycle
While most payday loans are often repaid within two or four weeks, the average borrower tends to stay in debt for a more extended period. With high-interest charges and additional fees, most borrowers get caught in a cycle of rolling over.
In case you end up in this situation, it is easy to get in a cycle of rolling over loans and taking another payday loan to pay off an older one. For instance, imagine you need a $100 loan you need for emergency reasons. You acquire a payday loan at a fee that offers temporary relief.
Once it is payday and you do not have enough to meet your daily experience, you extend the loan. With limited time to pay off the loan and increased funds, it becomes difficult to break the cycle.
- Shorter Repayment Window
Once it is payday and you do not have enough to meet your daily experience, you extend the loan. With limited time to pay off the loan and increased funds, it becomes difficult to break the cycle.
We often take payday loans equal to our paychecks. This usually stops ups from repaying or taking up a new loan with higher interest rates. Still, as the repayment window closes, we start worrying about the next month’s expenses.
- Payday Loans Facilitate Unhealthy Financial Behavior
Payday loans are easy and convenient to get. However, it is a temporary solution for a short-term problem. This only facilitates unhealthy spending and saving habits which later on cause financial trouble.
Suppose you turn to payday loans to cover your daily expenses. In that case, those loans are particularly harmful as they take a hit on your finances. It encourages detrimental borrowing as you get accustomed to taking out fast cash loans every time you need money. You are also less likely to learn how to manage your finances properly.
- Single Repayment
Payday loans are often paid back in a single repayment. Some lenders have permission for direct bank withdrawal, allowing them to withdraw the loan directly from the bank upon your payday.
A significant amount of your salary goes as repayment. The downside of single repayment is that they are harder to close than installment loans.
It doesn’t add to the credit score. Many borrowers apply for payday loans thinking that it contributes to their credit history and overall score. However, payday lenders do not provide the loan details to credit agencies, thereby won’t show your credit report.
Even worse, if you default your payday loan, it is recorded by collections agencies. These agencies, in turn, report to credit companies, thereby impacting your credit report.
- Harassment from Lenders
If you default on payday loans, loan providers try to do whatever they can to get you to pay. Default loan payers often get constantly harassed through regular phone calls. Sometimes they threaten to file a criminal case against you.
Once they report your account to a debt collection agency, they call day and night. Dealing with this can be extremely hard, and you would need thick skin to ignore the threats.
- Court Summons
When you have defaulted their loans and threats do not work, you will likely get a formal letter to your office or home. This is the best time to negotiate with them and close the account. According to the terms and conditions of your agreement, upon signing, they can send you a court summon.
Other Alternatives of Payday Loans
With all these reasons to avoid payday loans, you may be wondering about other possible alternatives to payday loans. There are many alternatives you can consider before settling for a payday loan. Most of these alternatives are cheaper and less hectic.
- Loans from Friends or Family
Borrowing loans from close relatives or friends can be a less expensive option than a payday loan or even a credit card. This is because the person lending you the money may not charge you any interest.
Loans from friends or family members are often more flexible than payday loans or other types of loans. In addition, you can easily skip a loan payment date as opposed to a lender or financial institution. You choose the repayment plan period that fits your budget.
However, these loans by close people around you can negatively affect your relationships if you don’t pay off the loan in time. The lender you are borrowing from could feel pressured to loan you the money due to your relationship at the expense of their own financial ambitions.
In such cases, you can ask a friend or a relative to lend you money based on the market interest rate. This helps you choose how long you need to pay the loan in months rather than weeks. If you get the loan, be sure to return it before the duration ends.
- Credit Cards
A credit card offers you a fast and easy way to access money when you need it urgently. Even though interest rates can be higher than a personal loan, they are generally lower than payday loans. If your credit score is over 670, you can qualify for a low to zero percent interest promo.
You can always use a credit card loan even if you do not qualify for a zero percent loan. If you apply for these loans, always pay your loan in full to avoid being charged interest on the remaining balances.
- Personal Loans
When you borrow a personal loan, the bank deposits the amount as a lump sum to your personal account. You can use it for any purpose like everyday expenses.
Personal loans have more extended repayment plans that last between one to seven years. In addition, they range from $1000 to $ 100000, which is much higher than payday loans offer.
They also have a lower interest rate which ranges from 4- 36%, depending on your credit score. If your credit score is terrible, you may not be legible for credit card loans.
- Other Loan Sources
Go online and find out other loan providers that offer a longer tenure. Also, consider loan providers with lower interest rates than payday loans. Always try to opt for loans from banks than direct lenders for cash requirements.
Getting Payday Loan Help
The best way to handle a payday loan is to make an appointment with an accredited non-profit credit counselor. A payday loan is a temporary fix to what eventually turns into a long-standing financial problem. This is something you can learn to avoid.
Get a credit counselor to help you identify areas of your finances that need strengthening and reformation. A credit counselor will not only help you put together a budget but also explain things you can do to avoid payday loans. This enables you to keep up with financial needs while meeting your daily expenses.
Bottom Line
Payday loans are arguably an expensive option that can turn into a problematic and long-term financial situation. Before getting a payday loan, stop and consider the following things:
- Opt for a lower cost option like credit card and personal loans.
- Calculate the interest you may be paying and other options, then opt for other loan sources.
- Consider a loan from a friend or family if you have that option.
- When you utilize other options, you are more likely to be happier about your decision.
If you end up in a financial situation and need cash urgently, a payday seems like an easy way out. Regardless of what you opt for, consider educating yourself about pitfalls and risks associated with other loan sources.
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